Broker Dealer Regulatory Digest

Editor's Note
The following newsletter provides a roundup summarizing enforcement actions, guidance, rulemakings, and other public statements taken by a federal and/or state financial services regulatory agency, specifically focusing on: (1) the source of the development (regulator, legislative body, etc.), (2) the subject matter (consumer lending, money transmission, capital markets, etc.), and (3) the general issue covered.

Regulatory Developments

• Securities and Exchange Commission. National Market System Consolidated Audit Trail (NMS CAT). SEC approved amendments (see fact sheet) to the NMS Plan governing the CAT to adopt a revised funding model, called the "Executed Share Model," for the CAT and establish a CAT fee schedule applicable to the self-regulatory organizations that are participants in the CAT NMS Plan in accordance with the Executed Share Model. Separately, Chair Gensler, Comm'r. Crenshaw, and Comm'r. Lizárraga provided statements in support, while Comm'r. Peirce and Comm'r. Uyeda released opposing statements.
• Securities and Exchange Commission. Broker Dealer & Artificial Intelligence (AI). SEC Chair Gensler testified before the Senate Banking Committee on the agency's regulatory initiatives including the use of AI and predictive analytics, crypto, and climate and cyber risk disclosures.
• Securities and Exchange Commission. Broker Dealer. SEC's Division of Examinations published a Risk Alert providing additional information regarding the Division's risk-based approach for both selecting registered investment advisers to examine and determining the scope of risk areas to examine. Separately, the agency issued an investor bulletin on subscription-based advisory fees.
• Financial Industry Regulatory Authority. Rule 15c6-1(a). FINRA released a regulatory notice regarding the SEC's amendments to Rule 15c6-1(a) to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1).
• Commodity Futures Trading Commission. Cryptocurrency. CFTC Comm'r. Pham spoke at a conference on cryptocurrency regulation, calling for creation a U.S. regulatory sandbox for cryptocurrency.
• Commodity Futures Trading Commission. Commodities, Futures & AI. CFTC Comm'r. Goldsmith Romero issued remarks at NASAA's annual meeting addressing modernization of investor protection with technology (including responsible AI), the use of tech by regulators, and reproposing a National Financial Fraud Registry.
• Commodity Futures Trading Commission. Futures Commission Merchants (FCMs). CFTC released a no-action letter extending, through June 30, 2024, or the effective date of any final agency action relating to Reg 39.13(g), relating to "the treatment of separate accounts of the same customer, a beneficial owner" by FCMs.
• Commodity Futures Trading Commission. No-Action Letter (NAL). CFTC's Division of Clearing and Risk announced an NAL providing that the division will not recommend the agency take enforcement action against a foreign futures exchange for failing to register as a derivatives clearing organization as required by Section 5b(a) of the Commodity Exchange Act.

Enforcement and Litigation

• Securities and Exchange Commission. Non-Fungible Tokens (NFTs). SEC charged a company with conducting an alleged unregistered offering of crypto asset securities in the form of purported NFTs that raised approximately $8 million from investors to finance an animated web series. Separately, Comm'r. Peirce and Comm'r. Uyeda issued a dissenting statement which criticized the application of the Howey test in this case.
• Securities and Exchange Commission. Securities & Cryptocurrency. SEC settled charges against a software company for allegedly failing to register the offers and sales of its retail crypto lending product, while not imposing civil penalties due to the company's cooperation and prompt remedial actions.
• Securities and Exchange Commission. Marketing. SEC settled charges against nine registered investment advisers (#1, #2, #3, #4, #5, #6, #7, #8, #9) for allegedly advertising to the general public on their websites hypothetical performance without adopting and/or implementing policies and procedures required by the Marketing Rule.
• Commodity Futures Trading Commission. Decentralized Finance (DeFi) & Digital Assets. CFTC issued orders simultaneously filing and settling charges against three DeFi entities (#1, #2, and #3) regarding allegations that the companies failed to register as swap execution facilities or designated contract markets, failed to register as futures commission merchants, and failed to adopt a customer identification program as part of BSA compliance requirements. Separately, Comm'r. Mersinger released a dissenting statement on the actions.
• Commodity Futures Trading Commission. Spoofing. CFTC filed a civil complaint in federal court against a firm alleging spoofing, engaging in manipulative and deceptive trading practices, failing to supervise, and for violating a prior agency order.

Michael Buckalew is a regulatory analyst with Davis Wright Tremaine LLP.